INDIAN FINANCIAL SYSTEM-II

Presented by: (Group-1) Chandani

Shivam.Aakash

Class: ( F.Y) B.Com ‘B’Topic: Circulation of Money

Submitted To: Nirmal Sir.

CIRCULATION OF MONEY..

Meaning… Currency in circulation is currency that is

physically used to conduct transactions between consumers and businesses, stored in a bank, financial institution or central bank.

Currency in circulation is part of the overall money supply, with a larger portion of the overall supply being stored in savings accounts.

Factors Influencing Money Circulation…

1. Money Supply: Velocity of money depends upon the supply of money in the economy.

2. Value of Money: The value of money is high during inflation when value of money decreases because people will like to part with money as well as possible.

3. Credit Facilities: The circulation of money increases with the expansion of lending and borrowing facilities in the country.

4. Volume of Trade: As the volume of trade increases the number of transaction and the circulation of money increases and vice versa..

5. Frequency of Transactions: With the increase in the frequency of

transactions, the number of payments and receipts increases and, as a result, velocity of money increases and vice versa..

6. Regularity Of Income: If people receive income at regular intervals, they

will spend their income more freely and the circulation of money will increase.

But, if people receive their income at irregular intervals, they will prefer to hold more cash balances to meet the uncertain conditions in future and the circulation of money will fall.

Importance…Money being the life blood of a modern

economy, its circular flow gives a clear picture of the economy.

We can know from its study whether the economy is working smoothly or there is any disturbance in its smooth functioning.

The circulation of money is immense significance for studying the functioning of the economy and for helping the government in formulating policy measures.

1. Link Between Producers And Consumers:

The circular flow of money establishes a link between producers and consumers.

It is through money that producers buy the services of the factors of production with which the latter, in turn, purchase goods from the producers.

2. CREATES A NETWORK OF MARKETS:

As a corollary to the above point, the linking of producers and consumers through the circular flow of money has created a network of markets for different goods and services.

Problems relating to their sale and purchase are automatically solved.

3. INFLATIONARY AND DEFLATIONARY TENDENCIES:

Leakages or injections in the circular flow of money disturb the smooth functioning of the economy.

For example, saving is a leakage out of the expenditure stream.

If saving increases, this depresses the circular flow of money.

4. IMPORTANCE OF MONETARY POLICY:

The study of the circular flow of money also highlights the importance of monetary policy in bringing about the equality of saving and investment.

The equality between saving and investment comes about through the capital market.

5. IMPORTANCE OF TRADE POLICIES:

Similarly, imports are leakages in the circular flow of money because they are payments made to a foreign country.

To stop it, the government adopts such measures as to increase exports and decrease imports.

6. BASIS OF FLOW OF FUNDS ACCOUNTS:

The circular flow of money helps in calculating national income on the basis of the flow of funds accounts.

The flow of funds accounts are concerned with all transactions in the economy that are accomplished by money transfers.

HOW IS CIRCULATING MONEY

GOOD FOR THE ECONOMY? First of all, lets go clear about the circulating

money. It doesn’t mean that you need to keep spending the money.

It means that you have should be accounted for, and available for others to use.

The “black money” stashed away in foreign banks, under the beds, in the walls, etc. is the money that is not in circulation.

The money that you & we have in our bank accounts earning interest is well under circulation.

HOW IS YOURS AND MY MONEY

CIRCULATING.? Lets assume that except for the money

that govt. is holding for its expenses (collected via taxes), rest all the money is white money in our economy.

We’ll call this money ‘free floating money’.

This money is owned by the citizens only. A part of this money is with people

directly, for meeting their regular expenses.

Rest is deposited in the banks.

The money deposited in our banks, other financial institutions, invested in mutual funds, shares, etc. is not just sitting idle.

It is being lent in need: investors, institutions, entrepreneurs, who are using it further to start or expand their business, earn profits, establish manufacturing units/factories, etc., as the need be.

These activities, in turn, generate employment opportunities for others: new/expanding business need employees.

This employed workforce which is now earning money, generates demand for items, commodities, goods, etc..

This additional demand further generates employment as business need more workforce to take care of this additional demand.

Whatever money has been borrowed from banks need to be returned with interest. Hence, banks earn profit on that.

Further, that money was borrowed from you, on which you also earn interest. Hence, you are also profiting form that.

All these things help in increasing the Economic Activity of the country thereby strengthening Indian Currency.

NOW, WHAT HAPPENS IF THE MONEY IS NOT CIRCULATED OR

MAYBE LESS CIRCULATED?

Again consider another fig. where in Black Money also comes into picture.

The money which is not circulated does nothing but sits idle; not even earn interest.

This black money is not being utilized. This reduces the lending capability of the banks. Whatever is not utilized and hence the benefits

are reduced.

This is how Circulating money is good for the Economy of

any country..